NEW YORK, July 11 (IFR) - Tiny California-based Progreso
Financiero surprised many in the ABS market in June by selling
its second securitization based on loans that have a relatively
high risk of not being repaid.
The niche lender, which targets Hispanics with little or no
credit history, underpinned the deal with loans that average
just US$1,600 but carry at least a 30% interest rate.
Despite what might seem to be shaky collateral, however,
Progreso sold the unrated US$102m consumer loan securitization
to a wide range of buyers, CFO Jonathan Coblentz told IFR.
Led by Jefferies, the deal was sold to institutional
investors, banks, money managers and hedge funds, some of whom,
he said, had also bought Progreso's first trade.
The risks for investors are plentiful, of course, not least
because the debt is unsecured; there is no collateral available
to seize if borrowers fail to repay.
Even so, Progreso sold the A and B classes of the new deal
with 3.5% and 6% coupons respectively - even cheaper than the 4%
and 8% on its first US$137m trade a year ago, Coblentz said.
"One reason we have repeat investors is that people were
able to look at the track record of the first deal, and it was
better than projected," he said in an interview.
To help offset the risks to buyers of the bonds, the issuer
retained a subordinate 15% slice of each trade.
FILLING THE VOID
Like similar firms OnDeck and Social Finance, Progreso is
trying to fill spaces in the consumer loan market abandoned by
banks in the wake of new regulations since the financial crisis.
Even as those traditional lenders have pulled back, however,
lending to riskier customers in the United States since the
crisis has again been on the rise.
According to Equifax, six out of 10 US consumer finance
loans now go to subprime or other higher risk borrowers.
That spells opportunity for young companies like Progreso,
which was founded by Coblentz, a 14-year veteran of ABS banking
at Goldman Sachs and Credit Suisse, in 2005.
Licensed to operate in California, Texas and Illinois,
Progreso typically makes loans with a 17-month maturity at an
eye-watering interest rate of 30%.
And some customers likely are on the hook for a great deal
more than that.
In California, for example, Progreso is part of a pilot
program to help borrowers gain access to small loans, said Alana
Golden of the California Department of Business Oversight.
In exchange, the company is exempt from state usury laws and
other limits on the fees that banks can charge for loans.
One ABS banker, who was not involved in selling the new
trade and asked not to be named, said at least some customers
having trouble paying would simply refinance the loans.
And that could mean a new origination fee, late fee,
interest charges and other costs - all of which could make it
even more unlikely for any loan not to be repaid, and thus
increase the risk for investors in the securitizations.
Because it is not a public company, Progreso is not required
to make public certain information, though Coblentz said the
percentage of failed loans was in the single digits.
Several ABS bankers said this was a surprisingly low figure,
especially as much of Progreso's customer base can simply leave
the country, and the loans, behind.
"It's not a customer pays or doesn't," one of them
said. "It's probably more like kicking the can down the road."
But Coblentz insists Progreso is seeking quality borrowers,
saying it aims to more than double its consumer loan business to
one million customers by 2016, and to diversify into auto and
small business loans in three to five years.
"We only want to lend to customers who we believe can
repay," he said.
(Reporting by Joy Wiltermuth; Editing by Marc Carnegie and